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Higher spot LNG prices bode well for the future

* As a result of a demand-supply mismatch, spot LNG prices rose to USD38/mmBtu from USD2/mmBtu in May’20.

* Our research shows that higher spot LNG prices have resulted in a culmination of more long term LNG contracts in CY21, thereby raising the Final Investment Decisions (FIDs) for LNG liquefaction terminals going forward.

* Higher number of FIDs would help increase the supply of LNG, thereby reducing the slope of gas to oil. Favorable gas prices would bode well for India’s Gas sector in the medium term. Key beneficiaries: GAIL, GUJGA, GUJS, and PLNG.

Higher spot LNG prices, a blessing in disguise

* From a low of USD2/mmBtu in May’20, spot LNG prices have risen to USD38/mmBtu on: a) delays in upcoming LNG terminals due to the COVID-19 pandemic, b) increased demand from China due to the replacement of coal, and c) supply disruptions, primarily in the US.

* On the brighter side, higher spot LNG prices have revived the long-term LNG market, with the signing of ~32mmtpa of SPAs (sales and purchase agreements) in CY21 till date as against 22-23mmtpa each in CY20 and CY19.

* Higher long-term SPAs are likely to result in more FIDs, which over the next few years would result in a decline in spot LNG prices (Exhibit 1) and thus the slope of gas to oil, thereby favoring consumption of gas over oil.

India’s gas consumption: higher availability + better infrastructure = growth

* After remaining stagnant ~70mmscmd for the past five years, domestic gas available for commercial consumption has risen to ~80mmscmd in the past few months. Domestic gas production would get a further boost, primarily from RIL (+12mmscmd) and ONGC’s (+15mmscmd) assets in the KG Basin.

* Since domestic gas availability would not suffice the demand of ~220mmscmd projected in FY27E (Exhibit 5), import infrastructure would remain key to growth in gas consumption. We expect India’s available LNG capacity to rise to 66.5mmtpa in the next 3-4 years from 42.5mmtpa.

* Key trunk pipelines like Jagdishpur-Haldia, Kochi-Bangalore, Mehsana-Bhatinda, and North East grid would facilitate better gas penetration.

Valuation and recommendation

* We conclude that favorable gas prices would benefit domestic consumption, thereby benefiting the overall gas sector in the country. Key champions on this theme are GUJGA, GUJS, and GAIL.

* GAIL (Buy with a TP of INR200): In light of commodity prices turning favorable again (higher spot prices in the medium term, increase in petchem margin in 3QFY22, and better LPG price realization) and the reality of de-risking US Henry Hub contracts (eight cargoes in 2Q v/s 14 in 1QFY22 sold outside India) coming to light, we reiterate GAIL as our top pick in the largecap space.

* GUJS (Buy with a TP of INR450): PNGRB has taken up tariff review of GUJS' HPP grid to determine the new tariff from FY22 onwards and would adjust it for the new tax regime. Proposed capex stands at INR45.4b till FY32 on a net block ofINR53.8b at the end of FY21. The increased capex will augment newer LNG terminal capacities on the gird and would obviate the need for a tariff cut. We maintain our Buy rating.

* GUJGA (Buy with a TP of INR775): In the past one year, GUJGA has almost doubled its price to consumers at Morbi, the last raise being of INR11.7/scm at the end of Oct’21, after the INR9.5/scm hike in early Oct’21. So far, sales volumes have declined to 5.5mmscmd currently from 6.4mmscmd in 2QFY22. Unlike the past, where the company sacrificed its margin to maintain volumes, the pricing action shows a great resolute towards protecting margin. We maintain our Buy rating.

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